FTSE 100 earnings forecast momentum falters as election draws near and sterling rallies

The FTSE 100 got tantalisingly close in July to its May 2018 all-time high of 7,877 but it failed to kick on and one reason why was that corporate profit forecasts have started to trickle lower, hindered by weaker commodity prices, a sluggish domestic economy and the pound’s late-year rally. Since the start of the year, pre-tax income forecasts for the FTSE 100 for 2020 have slipped by 6% to £226 billion, although the good news is that figure still represents an 8% advance on the estimate for 2019.

Source: Company accounts, Sharecast, consensus analysts’ forecasts

The result of the UK’s general election on Friday, the outcome of subsequent relations with the EU and also the timing and nature of any conclusion to the trade talks between America and China remain key variables going forward, alongside those factors which are already influencing estimates for 2020.

A lot could change relatively quickly, but if the FTSE 100 does deliver that 8% profit increase for 2020, with its projected 4.7% dividend yield on top, that could give the index fresh impetus in its efforts to set new all-time highs next year – especially as central bank policy is likely to remain accommodative and governments around the world are moving away from austerity and toward looser fiscal policy.

That estimated £226 billion figure would also represent a new record for FTSE 100 aggregate profits, exceeding the (commodity-boom-led) £202.2 billion of 2011 and the pre-crisis peak of £164 billion in 2007.

Source: Company accounts, Sharecast, consensus analysts’ forecasts

An uptick in GDP growth, both at home and overseas, should benefit the FTSE 100’s earnings power as cyclical sectors such as banks, miners and consumer discretionary plays (leisure, retail and travel firms) have seen consistent downgrades to profit forecasts through the year, alongside the oils.

Source: Company accounts, Sharecast, consensus analysts’ forecasts

The benchmark index’s earnings progress remains heavily reliant upon financials (notably banks), oils and miners in particular, although consumer staples stocks are expected to once more provide welcome ballast.

Source: Digital Look, analysts’ consensus pre-tax profit forecasts

Oil and commodity prices are therefore a key factor for 2020, although these are unlikely to be affected unduly by the UK election result. OPEC and Russia have agreed to a further production cut of 500,000 barrels per day, taking their total reduction to 1.7 million barrels, so it will be interesting to see if this helps the oil price. In addition, copper, iron ore and aluminium in particular have shown some signs of life in the second half of 2019, as has the Bloomberg Commodity index more generally, which could be a good sign.

Source: Refinitiv data

Source: Refinitiv data

Increased prices would be a profit boon for the commodity-heavy FTSE 100, as would further income increases from the banks. The election could have a much greater impact here, depending upon policies that range from housing to tax and the more wide-ranging issues of Brexit and how best to direct the British economy going forward.

Source: Company accounts, Digital Look, consensus analysts' forecasts

A final (?) batch of PPI charges are weighing on the results of the Big Five FTSE 100 banks in 2019, as are a gentle uptick in bad loan provisions. The latter trend must be watched in 2020 as any domestic or global slowdown lead to further increases here, to the detriment of reported profits. Banks’ net interest margins also remain under pressure thanks to the unintended consequences of central banks’ low-interest-rate and Quantitative Easing (QE) policies, which are flattening the yield curve and credit spreads alike.

Poor share price performance across the sector does suggest that investors have yet to be fully convinced that the big lenders indeed in rude health, but for the moment, analysts continue to pencil in a further increase in the Big Five’s earnings for 2020, to a fresh all-time high of £37.9 billiion, some way ahead of £35.8 billion peak reached just before the financial crisis broke in 2007.

Big Five banks’ pre-tax profit (£ million)

Source: Company accounts, Digital Look, consensus analysts' forecasts

All of this means that there are many moving parts to the FTSE 100’s profit forecasts for 2020, with some certain to be affected by the election result, the others less so, if at all.

However, the UK stock market does not look expensive relative to its international peers or its own history on an earnings basis, since the FTSE 100 trades on around 12.5 times consensus earnings estimates for 2020.

Throw in a dividend yield of 4.7% and the UK stock market does have three things going for it, even if the election result could shape sentiment, sterling and profits for years to come, since the FTSE 100 has already underperformed, it is potentially cheap and it offers a meaty dividend yield.

These articles are for information purposes only and are not a personal recommendation or advice.